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China milk antitrust probe may be step towards consolidation

By Donny Kwok

HONG KONG (Reuters) - The decision by China's top economic planner to investigate five leading foreign infant milk companies for suspected antitrust violations may be part of a broader plan to boost consumption of the local product, analysts said on Wednesday.

Mothers turned away from Chinese milk powder in 2008 when infant formula tainted with the industrial compound melamine killed at least six babies and made thousands sick with kidney stones.

China has since made efforts to crack down on persistent food safety problems that have included chemical-laced pork and infant milk contaminated with cancer-causing agents.

Infant formula makers Nestle SA , Danone , Mead Johnson Nutrition Co and Abbott Laboratories said on Tuesday that they were being investigated by China's National Development and Reform Commission for possible antitrust violations.

Analysts said the investigation could result in fines and tougher rules governing imports into an infant milk market set to grow to $25 billion by 2017. The firms could face fines ranging from 1 percent to 10 percent of their annual sales, the state-run Xinhua news agency quoted experts as saying.

"It is part of the whole idea of a consolidation process," said Renee Tai, a Hong Kong-based analyst at regional brokerage UOB Kay Hian. "It is pointing the same direction of supporting local producers, making it difficult for importers."

Some Chinese infant formula companies have started forming partnerships with foreign firms to try to boost brand recognition and gain technical know-how.

"Since consumer confidence in the Chinese products is seen as improving, it can be a chance (for Beijing) to test if confidence in local brands can hold its own against the foreign competition," Linus Yip, chief strategist at First Shanghai Securities.

Foreign brands may also soon have to rely on their Chinese partners if they want greater access to the Chinese market.

The Chinese government has expressed an interest in bringing the supply chain under the control of Chinese firms as part of its goal of reducing the number of local infant formula producers to 10 from more than 200 within two years.

The Ministry of Industry and Information Technology said in June that integration of the milk powder industry was expected to involve 10 large companies with revenues exceeding 2 billion yuan in two years, according to the China Daily.

"They have to boost local consumption before they can proceed with the consolidation more smoothly," said one retail analyst at a regional brokerage, who was not authorized to speak to the media.

As part of this consolidation, China Mengniu Dairy Co Ltd <2319.HK> signed a second takeover deal in a month in June to buy Carlyle-backed Yashili International Holdings Ltd <1230.HK> in a deal worth about HK$12.5 billion ($1.6 billion) as part of a plan to expand its milk powder business.

On Wednesday, China's official Communist Party mouthpiece, the People's Daily, said foreign and local players were equal before the law but that foreign brands should not raise prices frequently without regard to the law and abuse their competitive advantage.

"From 2008, some foreign milk powder brands have increased their prices by up to 30 percent, nearly double that of local milk powder brands," said an editorial in the People's Daily, adding that if local brands raised standards and won trust, they could replace foreign brands as the favorites.

Internet commentators on China's Sina Weibo were not so sure.

"This is practically forcing Chinese children to drink locally made milk," said one Weibo user. "It's really shameful that we can't produce good milk and now we are preventing others from selling it."

(Additional reporting by the Shanghai Newsroom; Writing by Melanie Lee; Editing by Nick Macfie)

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